'Condoblue' explains: Why I'm walking away

An update this morning from Condoblue. For those of you just joining us, Condoblue is the poster who plans to walk away from a mortage and move into a new home -- even if it means foreclosure. Reaction here was split on whether Blue's decision was a smart business move, or a sign of poor personal character. Condoblue read your comments and responds this morning:

"As the original poster, I'd like to add some facts to the story since there have been so many assumptions made about my situation. Apparently, it hit quite a nerve, judging from the torrent of postings.

"I did not get House #1 with a liar loan; it was fully documented. I could have put money down but chose to hold on to my cash. As it turns out, the value has dropped so much, it would have just been money down the drain anyway. I never planned to flip the place or make a quick buck (although I don't see anything wrong with making money). I just figured I'd sell or refinance it before the ARM readjusted. At the time I was looking, it was one of the cheapest condos I could find in a decent area.

"I don't have a grudge against big companies (hell, I work for one) or feel like I'm 'sticking it to the man.' Like many posters have said, it's just business.

I have a good income, credit, and savings, so am qualified to buy House #2 using my savings as a down payment. I have adequate income to meet the lenders' debt ratios to cover both homes, and then some. Servicing the debt is not an issue. Ironically, House #2 is a short sale.

When I applied for the loan on House #2, I expected the lender to question the upside-down status of House #1 (they can Zillow as well as I can), but they approved the loan with no questions or issues. I was surprised that they didn't even ask how much the new ARM payment on House #1 would be, but was told that they don't take that into consideration. Huh?

As for Big Lender on House #1, I called their loan department to see if I could refinance the mortgages and was told they don't refi homes with negative equity. I asked the loan officer if they have any programs available for people in my situation. He said he didn't know of anything, but that they did have loan counseling people available, but you have to fill out a questionnaire first before they'll talk to you. So I called another 800 number to get the questionnaire and requested it via their automated voice system. That was 2 weeks ago; no questionnaire (not that I have a hardship anyway). Later, buried on Big Lender's website, I saw where they supposedly contact borrowers 4 months before their loan reset, which would be early February. We'll see.

In terms of selling House #1, this is a cookie cutter condo in a town full of them, so it's easy to figure out its market value (zilch) and average days on market (eternity). There are plenty of short sales right here in the neighborhood, and they are not moving.

Finally, I realize my credit score will take a hit, but remember that I don't need to rent since I own House #2. I have stable long-term employment, decent car, and no debt so speak of. So what if my car insurance goes up a bit. Incidentally, the Federal tax-exempt status on mortgage debt forgiveness is only temporary, so if you are considering walking away from your equity-less home, better call your CPA and lawyer to find out the rules and start making plans..."

Thanks, Blue. Your thoughts? Comments? Be respectful, and please don't expect Condoblue to explain every intricate financial detail of these transactions. There's a lot of information here.
Read below for Condoblue's first post.

I am one of these people.  My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.

"Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit.  In fact, my bank won't even talk to me until I miss a couple of payments. 

"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.

"I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions. 

"I don't really understand why people view a business decision by a homeowner as a terrible moral lapse. However, when large lending institutions, with access to more sophisticated information than any consumer could imagine, make mistakes affecting thousands of people worldwide, they are not excoriated and vilified with the same righteous zeal."

Comments

[Arti]

You are doing the right thing, for yourself but also for the rest of us.

Those of us who didn't buy into the bubble want to see home prices come back down quickly to where they should be. This can only happen when there are many short sales, and this only happens when people walk away. What we DON'T need is a government doing everything it can to keep people in their unpside down homes, which props up the inflated prices and only slows down the eventual correction.

I repeat: people, stop being idiotic about this being a moral issue, it's all totally LEGAL and you would do the same. In addition, we need these people to WALK AWAY so prices can fall, NOT stay in their inflated homes.

[Keith]

I agree there is no moral issue here, business and financial plans change all the time. There's no reason to hold an individual to some higher personal standard than we hold business entities in general. Condoblue will take an appropriate ding on his credit, but he's not raping society in any way.

[Cal]

I think Condoblue is doing the right thing as long as loan #2 was originated with no fraud as he claims. It would be amazing lax underwriting that they wouldnt ask about home #1, but in a world of amazing lax underwriting nothing would suprise me. Lenders are quite simply reaping what they sowed.

[JohnnyB]

If you spend just a few weeks reading housing market related articles and looking at the summary data from the last 7 years, you cannot help but conclude that the current system is structurally flawed. To the detriment of the vast majority of folks. It’s set up to re-distribute wealth to the upper 1% and keep folks in debt – beyond their means.

As this is one of THE most important quality of life issues for all of us – where we live and at what cost – everyone should take a little time to do some information gathering on their own. It helps put things into a context that might otherwise allude one. The truth and the facts are easily obfuscated.

Industry leaders know most folks are not financially savvy or literate. Folks have hopes and dreams and they can be passionate and emotional about them… this can often lead to what many might consider to be irrational behavior. This gets amplified when the “heard” mentality sets in. Let’s face it… it’s a dog-eat-dog, competitive world. At the least, we all want to survive and provide safety and comfort to ourselves and our loved ones. Beyond that, making money and maintaining or increasing our standard of living is always on most folks minds.

Most folks don’t really know how to go about the latter, so they’re easily manipulated. We’re a “consumer” society, after all.

When we or folks all around us are getting repeatedly screwed and a focused reality of our own situation sets in or even a strong empathy for another’s misfortunes… this can often lead to what many might consider to be actually very rational, self-interested behavior.

When it comes down to personal survival, who can tell another to deliberately sabotage theirs?

The system that created this bubble is currently rigged (most realize this) and condoblue found a loop hole through his own savvy that allowed him to “escape” relatively unscathed. Good for you condoblue.

The ability of someone to “jump ship” like this and then just “jump aboard” another ship just reinforces how **cked up the current mortgage industry is.

[sheila]

this is a little off-topic, but since condoblue mentions it, it is also a good example of how credit score "snapshots" are complete crap, as poor poster "marc" on the previous posting mentions. here's a guy that CLEARLY is going to have a significantly different debt ratio within a few months, the lender (on house 2) knows it, but is able to use his current outlay as a basis.

you can manipulate your score just by not using your "daily" credit card for a month (even if you usually spend $3,000 - $5,000 on it each month) as well. carrying long-term, low interest tax deductible debt dings you as hard as carrying volatile 24% non-deductible credit card balances, too. it takes FOREVER to get your score to move up in a meaningful way, and one late payment to dash it 30 points or more. credit scores are a joke, and this is one more example of why.

meanwhile, marc was intentionally targeted by lenders for a sub-prime ARM (many of which are in the 9% interest range, btw), pays all his bills on time for 3 years (so his score is obviously trending upward), then since ALL OF A SUDDEN, even though they had been shoving money down everyone's throats for 6 years, lenders decided to refuse re-fi loans to EVERYONE with a lowish credit score. At the time he took the loan, Marc had every reason to believe he could re-fi if he could get the original loan, has paid up every month, and the lender is hanging him out to dry based on the arbitrary BS of his credit score, which is better than it was when they gave him the first loan.

everyone was pilling on about how irresponsible he is, but i disagree. he saw an opportunity to pull himself out of poverty by making the type of investment we all want (and which has been an enormous, long-term source of wealth for the middle class for a hundred years), and took it. it's lenders' horrible policies (then and now) including obsession with stupid credit scores which are causing people like him to lost their homes, not his greed or irresponsibility.

[TakeFive]

I was in a similar situation. Bought a condo in 1990 and chased the market down trying to sell. After years (years!) of trying to sell and watching the neighborhood go down, with drug dealers and gang members renting adjacent units, I had enough.

Fortunately I was able to do a short sale with minimal credit damage. Lost my 20% down payment, but that was trivial in comparison to spending years trying to tough out a bad situation. I regret waiting so long, but then it took the banks a while to come to terms with reality and become willing to deal.

Lost my innocence trying to do the honorable thing the last time around. It’s just business to the bank. Angelo’s severance package is proof of that.

[Mike Barker]

I am not a real estate professional nor a lawyer so could "Ann" or someone qualified please confirm or correct my impression of what a "Deed of Trust" is? Is it not true that the reasons we have "Deeds of Trust" instead of "Mortgages" in the west is so that if we do not make our house payments the "trustee" can more easily remove us from the property? And is it also not true that we in the west like "deeds of trust" more than "mortgages" because if we cannot make the payments, we can walk away and the ''trustee" cannot take any other property we own?

If these interpretations are correct, would Condoblue have any obligation to the lender?

[StayClassySanDiego]

I think Condoblue is very brave for sharing his story, especially on this blog.

I really can't blame Condo. I am just continuously surprised at how stupid lenders are. I guess I shouldn't be--I've worked in financial services, and I saw my fair share of idiots.

Most people I know who've had their credit trashed seem to make miracles happen - they obtain credit cards, find employment, and even buy houses. I'm thinking that may change soon. (Recognizing in Condo's case, he/she doesn't need credit for any reason, so it's a non-issue.)

[Monkey Under The GPs Microscope]

Condoblue, don't sweat it. Corporations walk away from projects all the time. I can recall Hamilton Cove condo project on Catalina Island; during the 80's at least 2 companies sunk money into it before walking away when it became financially non-viable.

[RichW]

"At the time I was looking, it was one of the cheapest condos I could find in a decent area."

"I have a good income, credit, and savings, so am qualified to buy House #2"

"but remember that I don't need to rent since I own House #2."

"I don't really understand why people view a business decision by a homeowner as a terrible moral lapse"

Your own words answer your question quite well...

[tony]

I agree with Arti and I have an additional proposal. Not only should people walk away from homes when the loan exceeds the value, I think buyers such as myself, with 100k to put down, credit in the high 700s, making 150k per year, and who still cannot afford to buy a decent house in a falling market, should start making lowball offers based on where we think the market will bottom out. For example, in Sierra Madre, prices are still in the 600 to 700 dollars per square foot range. I'm looking to buy when it drops to 350. All I need is a realtor to start taking these offers to sellers. If enough of us do this, and stand our ground, then maybe prices will come down to income based reality. As far as the economic benefit/cost, lenders lose, consumers win with lower housing costs, and disposable income increases. I'm no economist, but I know that I'd love to have an extra $1000 to spend every month to stimulate the economy. Any realtor interested in presenting lowball offers? Sales commissions on lower selling prices are better than no commissions at all.

[laura l]

I agree that government intervention is not required. Let the invisible hand do what it needs to do and correct the market.

Having written that I have a problem with condoblue for the following reasons:
It is because of condoblue types that real estate prices skyrocketed to unrealistic levels. Condoblue is breaching his contract that shows a lack of character. I wouldn't do the same thing because I wouldn't have bought an obviously overpriced piece of real estate in the first place.

For me personally it doesn't matter that much since the areas I'm interested in are still expensive regardless of this "bubble" or not.

Ultimately banks are run by a bunch of idiots. That is one thing we can all agree on, I would hope. E.g. France's bank losing billions--amazing!

[shockg]

What a slime ball. own up to your obligations dude.

[Timc]

I have to agree that this is not a moral issue and at the end of the day this whole mess needs to be resolved by home prices returning to normal. This can only be achieved by more folks walking away from their massive loans and negative equities. They take the credit hit and hopefully can turn their financial lives back around in the years to come.

I ask this:

Why should I expect someone to be burdened with tens of thousands of dollars in lost equity that they will never get out from under just so I can say I have equity in my home??

I don't expect them to. This whole mess was fueled by greed and speculation. Personally, I thought I would be priced out of the market forever. I am lucky that I bought a very affordable home before the extreme runup. Others are not so lucky, were lied to by RE and loan agents, and had not seen this type of thing before.

My opinion is that this mess will only resolve itself after hitting rock bottom. This was created wealth, easy credit, and now it's payback time. Hopefully our country can learn that what it needs is affordable housing that gains modestly in value, tougher credit and loan standards, and an economy not built around volatile principles and manipulation.

So walk away if you think that will be better for you personally in the long run. You owe these banks that sold us out NOTHING.

[AK]

Smart business decision and more power to you. After all, we live in the great US of A where capitalism is in full force - the survival of the fittest. Those "big" corporations, when they lose money and need to start to cut costs, the first thing they do is start laying off people. So anyone who tries to think that Condoblue is being immoral by walking away, think again.

[mike]

why don't you rent that first house? one day-and it may be 2 years or 10 years- from now you will say what everyone says...BOY I WISH I HAD HELD ON TO THAT ONE. i own 4 rental properties and the only houses i am upset with are the ones that i sold!!!!!!! i would have been furious if i had just walked away. one more thing. your story doesn't wash . if you had such great credit and income you would be horrified at losing it and you would (or should) know the value of holding real estate as a long term asset. i personally don't buy all of your story.

[BigD]

I wouldn't ruin my credit for this....

[Dave P]

CondoBlue, none of what you added suddenly makes you a good guy. You could have put money down on #1 but didn't. Could have taken a fixed but decided to gamble. These are choices you made yourself, so you of all people can't blame the market of the lender for your situation. Many others took 100% ARMs because that was the only way they could get in. They aren't any better but at least if they had the means you claim to have they may have made better decisions.

Here's the thing: when you signed your loan papers there was no provision that you would bail on the contract if the market tanked and your house was upside down. You didn't inform the lender that your word wasn't worth anything if suddenly you weren't going to realizing 15% gains yearly. It would be like getting married and saying that you will bail on your wife the first time some hot young thang looks your way.

Plus you haven't seemed to learn. In this declining market, you elected to buy ANOTHER house. If the value goes down 30% from your purchase price, are you going to walk away again? When does your word mean something?

p.s. If things had gone in your favor with house #1 and you saw double digit appreciation, where you going to call your loan servicer and ask to renegotiate the terms of your contract in THIER favor? People kill me when they want to keep all the gains but share or pass off all the losses.

[Ed]

You just reaffirmed my original feelings. You're a deadbeat. But sure, as Arti says, you're doing the right thing because many people have no moral conscience anyway. If your situation was similar to the lady who was walking away from her loan because she lost her job, had kids to feed, etc., I can understand it and they have all the sympathy I can muster. But you're saying you have money in the bank, a job, good credit.......naw, I don't buy it. Rationalize it with all the comments that were made about it being a legal issue vs. a moral issue, big business being crooks, politicians, "Bushco," Iraq, Afganistan, blah blah blah, but it comes down to the same thing: You have zero integrity. Hmmm..........I wonder what your real name is. Seems I had a friend once just like you.

[Keith]

You are doing the right thing. People need to remember that the corporations and hedge funds do not have any honor or moral obligation when it comes to holding borrowers to their contracts. Borrowers should not have any qualms about using that same contract to their favor. These industries spend millions lobbying congress to prevent consumer protection regulations from denting their profits. They say the market is efficient, and the market will take care of any problems that arise. Well, there is no solution more capitalistic and market based than two parties adhering to a contract.

And in case you were in doubt about your decision, I have a link on my blog to a video of Jim Cramer telling people to walk. Of course, agreeing with Jim Cramer may not make you feel better.

Enjoy your new home!

[Jlee]

It's also totally a finanical issue. People walking away from homes, and foreclosures in general hurt the value of people who actually bought what they could afford. I bought mid bubble, and am doing fine. Of course, I will have to stay in my house until the market recovers, which will take longer the more these "financial genius'" don't live up to their obligations. The reason there is a business to lend you money in the first place is because people before lived up to their obligations. It's all about ME, ME, ME. Our society is doomed.

[Rip N Tear!!!]

CONDOBLUE!!!!!! Nice work......I have a friend who just handed the keys back to the bank.

The system needs to COLLAPSE to become stable, injecting money into the system, only delays the crash AND the "stable" recovery, so my opinion is... ... If you are 50, 100, 150K upside down, give the keys back let your credit take a hit for awhile, you will be better off in the long run, and the bank will survive, Im sure....

SCREW THE BANK.......they saw this coming LONG before you did. Trust me, you paid for the Ferarri in the CEO's garage a long time ago.

[Nancy]

Walking away from Home #1 is one thing. Selfishly buying another - which will probably lose its value as well - is another!

[anon]

Capitalism without recourse to bankruptcy cannot work.

Are the people here who have some weird problem with what condoblue is doing advocating that we change to a Socialist or Communist system where the government forbids us from risking too much capital through tight, tight governmental controls?

Or are you advocating a return to some sort of Feudalism where the common man, who makes a financial mistake, for whatever reason, must be buried under that mistake for the rest of his life?

You're advocating a return to serfdom if that's what you want.

The ability to walk away from debt is absolutely integral to Capitalism.

There is NO Capitalism without some ability to walk away from debt and start over.

Period.

End of story.

[l.a.guy]

Everyone is focusing on CondoBlue but the bank is just as much to blame as he is. As others noted in yesterdays post, California has no-recourse loans for a reason.
(http://en.wikipedia.org/wiki/Nonrecourse_debt )
By definition the borrowers liability is limited to the property put up as collateral. The beauty of this system is that it is in the interest of both the lender and borrower to make sure the loan is equitable. If the bank does proper due diligence and insists on a reasonable LTV to insulate them from loss then they have nothing to fear. The only reason the bank will lose money on CondoBlue is because they ignored adhering to sensible lending requirements at their own peril.

CondoBlue's deal was either I'll pay you or give you back the property. He's giving back the property. The fact that the bank put them selves at risk has nothing to do with CondoBlue.

[mdp]

Problem No. 1: "they can Zillow as well as I can." Zillow is bs--it can't possibly fairly evaluate view, quiet/noise impact, quality of interiors, etc. It has some--some!-use in tracts or for new homes, but if people take their garbage Zestimates as gospel it's going to punish anyone who wants to improve their property. As a--full disclosure-- architectural Realtor, I find its spread pernicious, because it's already the case that the horribly flawed appraisal process doesn't factor design quality (much less structural strength, caliber of systems like electrical) in. This is how we get McMansions--assuming size is everything and quality worth zero. I suppose this is the American way, but over-quantifying everything just pushes us more in the direction of more is more, which the world doesn't have enough resources to support anyway.
Problem No. 2: What happens when our walk-away friend has to change jobs and move to a new city? Does he walk away from House No. 2 as well? Unless financial necessity requires getting out from under it, this is unethical. He can always rent both properties. And wait for gratification until he can afford it...by the way, this cheerleading for a collapse is kind of amusing, although it would help me buy finally (didn't buy in NYC ten years ago, one of the worst mistakes of my life), all it will do is enrich cash-flush speculators who will buy up everthing to rent the properties (which will then be high cash flow) while all the bubble-watcher wait for another 30% down, and then the (smart, not just boom-joining) speculators will book obscene profits 7-10 years later. This is exactly what happened to condos in Manhattan during the early 90s bust.

[Kelly]

Tell the president and congress no bailout!!!!!. Don't raise fannie mae limits, don't bail out the banks. Let them pay for their lax lending policies.

email: comments@whitehouse.gov

[JesusCrispy]

You didn't have to buy condo #1. You drove up the prices for everbody when you acted like a lemming and bought in the first place. Typical Californian, following the crowd over the cliff when you bought now following the foreclosure crowd.

[are they crazy]

What it appears the majority are saying is as long as a business component is involved in a decision there's no morality necessary. I also see lots of comparisons of corporations and people. The only purpose of a corporation is to make a profit - is it being suggested that now it's the only purpose in life for humans also? With this guy's thinking, I guess no one should ever pay their car payment's either - once you buy the thing, it's a depreciating asset, so why keep paying. This guy chose not to put his own money into the home, chose to take an ARM and is now choosing to walk away from the house solely because it's not making a profit. I don't see where this is right. It's not as if he has no means to pay his obligation, he just chooses not to.

[RadioManTodd]

Why is it that developers form LLCs for all their new properties?

So that when the new property tanks, they can walk away from it without making their whole operation tank with it.

The only difference here, is Condoblue wasn't wise enough to forsee the future and plan ahead and buy property under the name of a newly formed LLC.

I don't agree with the principal, but to the same extent, I can't say that I necessarily blame him for doing it.

[sunsetbeachguy]

Condoblue is a self-interested, somewhat smart, scumbag. It is both the right thing to do for him personally and deeply wrong and bad for society.

There are lots of them in greater LA.

Hopefully, condoblue loses his job (due to the instability in the market that his behavior created) and his next employer checks his credit out before hiring and decides not to hire a scumbag.

We don't know what profession condoblue is in, but hopefully it doesnt include any fiduciary obligations, since he doesn't take commitments all that seriously.

[chost]

the people denouncing this guy for moral lapses are just completely stupid... do you seriously think that any corporation (ANY corporation, not an Enron type) would do any different? it's a business decision. there was no fraud. fulfilling your "obligations" means turning over the house. done.

if you have a problem with it, your master is calling you right now. he's probably listening in on your phone or email.

[Dr. JwB]

if l.a. guy is right, then Condoblue is fulfilling his contract by giving back the house. Then there is nothing to discuss, except that old topic:

This is a TERRIBLE time to buy a house, don't do it Condoblue!

[anon1137]

First, I'd like to compliment Peter V. and the posters on this blog for the thoughtful and well written comments.

Secondly, I agree with most of the posters, that walking away from your mortgage is a business decision and not a moral one in this case.

The only thing I wonder about is whether condoblue is overpaying yet again by buying in this market. He/she may have solved the short-term problem with house #1, only to transfer it to house #2. Of course, now you have skin in the game, so it will be harder to walk away from #2.

[upthecreek]

Mr Walk A Way//

will you be paying your HOA dues for the condo ..or will you expect the other owners in the complex to pay your share....and just walk away from that also...people like you make me sick!!!

[firesale]

If justice is to be served here, both for the irresponsible,
slimy lender and the greedy bubble-inflating buyer, then
several things need to happen.

(1) Let the bubble buyers walk and crash the market. Screw
the banks. The lenders deserve it. If a larger downpayment
is required or interest rates rise as a result, this will simply force
prices lower and lower. Gloating homeowners who think
they're RE braintrusts also need their noses rubbed in Economics 101.

(2) No smart new buyer must risk his or her real skin in
this game until we're on rock bottom. Let the inventory rot
under the hot California sun.

(3) When the bottom-feeders emerge, there numbers need to
be cleansed of all deadbeats who created and benefitted
from the bubble. Credit needs to be checked so ruthlessly
that these people and their extended shell families can't
possibly get clean enough to buy again. They will be welcome
to move into the newly vacated rentals of tomorrow's responsible
home buyers. It's their turn.

When Mr. Bubble finally returns to the market, he can live with 20%
of his neck in the noose (in what will, by then, be a recourse state)
and watch his home value creeping along with inflation.
May God speed the day.

Anything less is simply not "justice for all".

[Ann]

" am not a real estate professional nor a lawyer so could "Ann" or someone qualified please confirm or correct my impression of what a "Deed of Trust" is? Is it not true that the reasons we have "Deeds of Trust" instead of "Mortgages" in the west is so that if we do not make our house payments the "trustee" can more easily remove us from the property? And is it also not true that we in the west like "deeds of trust" more than "mortgages" because if we cannot make the payments, we can walk away and the ''trustee" cannot take any other property we own?

If these interpretations are correct, would Condoblue have any obligation to the lender?

Posted by: Mike Barker"

Hi Mike

Deeds of trust are used in a majority of the states as being faster and easy if the lender needs to foreclose as compared to going through the court.

You hear about judicial and non-judicial foreclosures. The deed of trust is the non-judicial foreclosure mechanism. (Judical foreclosures offer a LOT more protection to the buyer - like making sure all payments were credited and that the company trying to foreclose really does own the mortgage.)

Works the same way as mortgage with a judicial foreclosure. If it is a purchase money mortgage, the lender gets what the property brings at auction (or 'buys' it themselves for the amount owed) and that is the end of it. Can't come after you for more.

If it is a refi though .......just like a judicial foreclosure auction, in a deed of trust foreclosure auction if the propoerty doesn't bring enough at AUCTION, they can come after to you for the rest. Of course even if it is a refi, if the lender buys the property for the amount owed at the auction, the debt is paid in full and you owe nothing. It is highly highly unusual for the lender not to bid in the property for the amount owed.

It isn' whether the mortgage is in a deed of trust or in a traditional mortgage with judicial foreclosure that makes the difference in whether a lender can come after the borrower. What makes the difference is whether:

(1) Iti is a recourse or non-recourse loan where non-recourse meansyou (a) have to live there as your primary residence and (b) it was a purchase money mortgage and not a refi

(2) Did the property go at auction for the amount owed - even if the buyer is the lender as is the case 99.9999%o of the time

Now this is the general answer that applies probably to 95% of the states. There are always the 5% that do something weird and contrary to the rest.

[George]

It's not the bank's money. Once the loan is written it's wrapped up onto a collateralised debt obligation and sold off into the commercial paper market. The bank stays on as administrator and, as it is turning out, could not care less if the loan stands or falls. Spending extra personnel hours rescheduling the loan is something the bank is not paid for; so, it doesn't bother. It looks to me that the bank probably gets paid nice fees for processing a foreclosure. In the meantime the homeowners and the noteholders are both being taken for a ride.

[Hula Girl]

Hey Condbleu,

You could be smarter than the rest of us buy walking away, on the other hand, you could be watching the equity zoom back up on the condo and kicking yourself.

I know. I was in your shoes. Husband left, took his retirement, left me w. two kids and a house in Santa Barbara that was upside down. He threw the keys to me and said it wasn't worth what we paid for it. It's my problem. That sucked. I couldn't sell it as I was upside down. I couldn't move to a rental w. two dogs, two cats and a pig (real pig, not ex).

So, myself and a 5 & 8 year old moved into the 400 sq.ft art studio I had downstairs and rented out the top. (The zoo came, too).

Well, guess what? The house doubled in value, I sold it and made a small but substantial profit. The buyer made 3X as much as it soared in value from 2003 to present. (It's worth more than a million now).

The long and winding moral is that everyone told me to walk away, but I knew if I did, it would be a long time - if ever that I could afford another house on a single mom, free-lance income. It was tough, but I did ride out the bottom and five years later was rewarded with a profit. The other moral? Damn, I wish I'd never sold that house.

[Tom]

It's hard to have sympathy for condoblue when he obviously has been able to use the system to his advantage, and come out smelling like a rose. We are looking at an economic disaster looming over the horizon, and it likely will be worldwide, not just in the US. It is shameful that so many, many homeowners have-or soon will have-lost their homes to foreclosure. Condoblue states that he will save money, but if his occupation becomes one of those sent overseas, perhaps he won't save anything. I would venture to say that he very well may walk away from house #2 before 2012.

[LA-renter]

With the new information, I've flipped:

Condoblue would be sympathetic if he were duped or misinformed and found himself in a desperate situation. For instance, he were capable to make payment now but incapable a year or two or three from now.

I imagine Condoblue's administrative assistant --at the big company, he says, he works at-- is barely making ends in a not so decent area and only dreams about pulling off the boss' trick.

Let's face it, Condoblue is not sticking it to the man... he is the man sticking you.

[A Beaupre]

We got out of the SoCal market 4 years ago because we knew the market wasn't sustainable - anybody who could read could figure out that the numbers didn't make sense. Tell yourself whatever you want, but at the end of the day you are screwing all of us because we will all pay for your default. Have a fantastic day! I hope you don't believe in karma.

[Downtown Bubble]

So I'm one of those bubble buyers too. And now I'm slightly considering foreclosing because I'm thinking it's going to take a long time to sell home at what I bought it for.

I bought directly from the developer during a sales launch and now they are selling the same unit for 50k less than what I paid for and expecting the price to go even lower. So I'm not so sure what to do right now, still doing my research.

I can actually afford to pay for the place though its really tough since 90% of my post-tax income goes towards this place. I am also considering Refi though, I'm waiting for the quote, hopefully that'll help, not sure though.

Yes, I bought in Downtown LA, HOA is also a killer..

[short seller]

"It's hard to have sympathy for condoblue when he obviously has been able to use the system to his advantage, and come out smelling like a rose..."

This reader's comment seems to exemplify the attitude of those who are critical of condoblue. They don't seem to be able to quite put their fingers on it, but they disapprove of his "using the system." Like the very rich who "use" the tax system, for example, to pay far less proportionally than the middle-class? Why is it OK to use the IRS's deeply flawed system but not the financial industry's broken lending system?

Condoblue's story rings absolutely true to my experience with the dysfunctional mortgage credit world, and it is condemning. Those who blame condoblue for successfully navigating it are probably just misdirecting their frustration and rage with themselves for not having managed to.

[joeinlosangeles]

I don't know that I agree with your take on this. The way I read it, the majority are saying, "You signed a contract with a knowledgable lender who has done a hundred thousand times more real estate deals than you have, so your only obligation is to follow the terms of that contract. So if the contract allows you to walk away from the loan by surrendering the title to the house, you have no need to have moral qualms about that, because the knowledgable lender should have factored in that possibility."

--What it appears the majority are saying is as long as a business component is involved in a decision there's no morality necessary. I also see lots of comparisons of corporations and people.--

[???]

Uh, Hula Girl, learn how to spell. In the context of your statement, "buy" is spelled "by". And this bubble far surpasses any rational modicum of affordability. As such, a double in value is a long shot at best. Worse than Vegas. Common sense would then dictate walking rather than waiting.

[Confused]

Condo, good for you. Why should the irresponsible who knew (or at least should have known) get a pass (read: bailout) while the ones who can afford be made to pay the full vig? Oh yeah, I forgot we're in the USSA, the United Socialist Society of America. Reward the lazy and irresponsible at the detriment of the more intelligent, responsible individuals. Great. Maybe we can also build a wall to separate us from those wannabe Americans who call themselves Canadian.

[Lewis]

Admitting that I'm not the most erudite of posters, and empathizing with the dilemma, I want to expand on something that has had little mention so far.

Let's say that the lending corporations indeed either blindly or knowingly (being guilty of greed and/or myopia) ignored the consequences of grabbing all they could get from borrowers, and created large amounts of bad debt/risk.

Also, let's say that, as always, "good business decisions" are sought to determine the best interest of the corporation over the individual employees.

Now, let's add to that hundreds of thousands of foreclosures of much of that bad debt (due to "good business decisions" by the borrowers), resulting in $billions of lost income that was expected and necessary for operations.

When seeking a remedy, the corporations make "good business decisions" and decide to cut jobs, expansion, spending, etc. Then, what was for the borrowers a "good business decision" accumulatively becomes a direct, indirect, or even global economic consequence. (I do realize that the whole economy is much bigger than just this sector.)

There was REAL money given to the seller, so someone has to pay for the REAL loss. In the end, I doubt it will be the Angelo R. Mozilo's of the world. Even if we WERE trying to "stick it to 'the man'", it would be to ourselves and our neighbors.

[debrap]

You "walkers" are absolutely right. Good on ya as the Aussies say!!

[Steve]

For Condo this is a pure buisness decision like it was for the mortgage company and the risk factor is part of the cost for both parties. As far impacting your credit rating that is a joke, Condo will have mortgage companies mailing him applications within months after House 1 is foreclosed on. Again, nobody gets paid until the deal closes and all the mortgage brokers, mortgage companies and Fed Govt are whores. As far as Zillow, I feel it is 10X more dependable on values then appraisers when they only get callled back if the deal closes. With technology the appraiser offers no value at this point and is always subjective.

[Chris]

Although condoblue is in a bad situation I really can't blame them for taking this route. People who bought anywhere in the last few years with the market rising 25-40% year over year for multiple years really needed to have their heads examined.
I am a professional with a good salary but as a single person without a ridiculous amount of money to put down I never even considered buying a home in this market. Lots of people made crazy sums of money flipping and selling homes that had inflated in a pyramid scheme like environment but the rest of us folks got left in the cold. I would have loved to have made a mint but I got here too late to join that frenzied party and I honestly have no regrets.
Lets face it, there are only so many people out there in ANY part of the country that can even consider forking out $700k for a "starter" home or $500k for a tiny one bedroom condo. The money numbers just don't add up when rent on a nice one bdrm condo is only $1300/mth but to buy would cost well over $2k/mth with high property taxes induced by the inflated sale cost.
Only when prices come back to early 2000 levels will people really start buying again in significant numbers. There is just too much inventory and too many skiddish buyers out there, especially when loans are difficult to get and we have an idiot in the White House.
Businesses do this type of thing legally over and over again. Perhaps we as individuals need to start thinking more like these businesses. Get off your moral high horse otherwise when things go sour for you it will be too late when you see the painful writing on the wall.
Sorry for you guys who bought at peak of market or even near it, but you didn't do your homework and look at the California real estate market history!
Shame on you...

[ajk]

I like the argument that it's not a moral issue; corporations don't have a soul, so neither do people. Tell that to you to your imam, rabbi, and minister.

[1]

‘Condoblue' is a scumbag. He gambled, and lost. Now he leaves everyone else to hold the bag. We all will pay for his irresponsibility.

[bestcountrywestofthemississippi]

"I think buyers such as myself, with 100k to put down, credit in the high 700s, making 150k per year, and who still cannot afford to buy a decent house in a falling market, should start making lowball offers based on where we think the market will bottom out."

You're not doing this already? I mean, I've been laughed at by several seller's agents (representing REO property or not), but who cares? Things will find a level, and it's lower than where we are now ...

[Hula Girl]

??? wrote "Uh, Hula Girl, learn how to spell. In the context of your statement, "buy" is spelled "by".

Interesting how you focused on the typo and not the message. Clearly you prefer style over substance, which I'm guessing is why you and others of your ilk would walk, or most likely drive away from your obligations in your new SUV.

[Inland Empire]

Nice example of situational ethics.

[Hula Girl]

Hey Condoblue - where is this mythical $350k condo? I'm looking for a place for me and my unicorn.

If it really does exist, is in L.A. proper, and you did pay $520k for it and it's going for 350k, please, mail me the keys. I'd love to find a decent condo for 350k.

[vultur]

When the lender for Property A forecloses and eventually sells the condo at a giant loss guess who's going to get a massive tax bill for the debt forgiveness?

Hint- the same guy who will see his interest rate skyrocket when the lender on Property B routinely pulls his credit record and sees that he defaulted on a mortgage.

No moral judgments from me- I am often been labeled a slumlord- but one thing I've never done is default on any payment of any kind and that clean credit history has allowed me to borrow millions of dollars at prime rates. Walking away from this condo appears to be a quick fix but it will haunt this guy for 7 years.

[A Realist]

1. Condoblue better hope that his lender on house #1 has not heard of the concept of "Deficiency Judgement" or he may find out he really does have to pay for his lack of moral character.

2. Condoblue also should hope that he does not get laid off as so many will in the coming recession because as part of the employment screening process for his next job they may pull his credit report and see that foreclosure on it and pass on hiring him. And good luck proving that is why he did not get the job.

3. Being a financial services professional for almost 25 years I can not say that I did not see this coming. But the reality is that the average individual is just a cog in the wheel of the economy and most of us are powerless to change the tide unless we want to be fired by our employers for speaking out. Angelo Mozilo excepted.

4. I am not happy one bit with the governments bailout plans but another reality is that if they don't do it we all will be living the word "Depression" and praying that we just would have had a "Recession". And when we have massive unemployment and there is no such thing as credit anymore because the entire financial system has seized up then how will any of us pay for a loaf of bread, a gallon of gas, or a home.

[Uncle Billy]

One or two condoblues = big deal, go for it, stick it to da big bad lender man.

100's of thousands of condoblues = financial armageddon

Seems like if we just let the condoblues walk en masse, we will continue to look at huge economic damage. But we can bring ourselves in for a less than crash landing; values can drop at a reasonable rate. Buyers with cash and credit will eventually be able to buy a home they like in a decent area...(fuhget Brentwood, baby). Don't be impatient; that might lead to an economic landscape so bad in CA that you wouldn't want to live here even if you could afford it.

[MIke S]

The guy is buying a home intent on walking from his existing commitment and you see the problem being the bank and not this guy? I see his posting as just the opposite of bravery--seeking public approval for an amoral plan.

"Bad Banks, Bad Lenders. Good Government for the bailout. Smart guy for walking." If I was in an overseas market I would be uncoupling my economy from the US as quickly as possible as well.

Those cheering him on, where do you think the money comes from that banks lend and the government hands out?

Who comprises those faceless, nameless corporation and the fed who "should suffer?"

It primarily falls on you, me, our parents and our kids to foot the bill though temporarily we can get the overseas markets to eat some of the cost.

For those cheering this guy on, are you going to blame the same evil bankers when your pension fund and 401k tanks. When oil is $5/gal as a result of our rapidly deflating dollar--"oh those evil oil producing nations and overseas markets."

THIS GUY IS STICKING IT TO YOU, ME AND OUR KIDS--BANKS ARE JUST THE INTERMEDIARY TRANSFER MECHANISM. The ship is sinking and here we are cheering it on. History will not judge our era kindly.

Mike S

[Liz]

On the one hand, I admire CB's analysis of the situation and ability to make it work for him.

However, I doubt that walking away from Condo #1 is going to be as easy as he thinks it will be. I suspect that sooner or later that decision will bite him in the ass.

Also there is an element of fraud to his actions which doesn't sit right with me. I don't buy the "everyone else is doing it" argument.

I'll be interested to hear how this turns out.

[2Blue]

I really like how Condoblue contradicted himself when he stated he had no intentions to make a buck or flip the house, but simply wanted to refinance or sell the place when the ARM adjusted.

It's very clear Condoblue has the funds to pay for the first house when the ARM adjusts, but simply will not since he realizes he made a poor business decision. One can argue either way whether or not Condblue is making a good/poor business decision to walk away from the first, however, it is people like Condoblue who has excaberated the housing market condition we are currently facing and the rest of us have to pay for his decisions.

Condoblue reminds me of that person you would make a bet with and when he would lose, he would refuse to pay up and attempt to justify by making up some poor excuse.

Condoblue - quit being bitter and own up to your losses. Either hang on to the first place and ride it out or rent it out (as someone has added) and move into the second.

If anyone ever questions why our government intervenes, it is because of people like Condoblue.

Thanks,Condoblue, for ruining it for the rest of us!

[LyleW]

What strikes me as a lack of common sense is this. He is in a condo that is upside down and a reset upwards of his rate is on the horizon. He walks away from the condo and buys house #2 with a down payment. What happens as the market continues downward and he can't sell the house with enough to cover the mortgage? Say he loses his job. He will eventually destroy his credit. What is the gain?

[Uncle Billy]

Blame France.

[StevenTR]

Since you documented your income, they will figure out what you are doing and move to garnish your wages.

[Kat]

According to a poster on the other board on this subject, Californians are judgement exempt for some reason - didn't explain why.

Everywhere else in the country a bank would move for a declaratory judgment against these deadbeats and try to collect. Evidently there is something in the law in California that protects these particular deadbeats from action by the lending institutions.

I just wonder if walking away is really as simple as Condoblue and the other deadbeats say. I watched 60 Minutes last night and one of the deadbeats said that since her house lost value it was her right to default. These people must know something.

I suppose it's a cultural thing. There is no forclosure crisis where I live because people aren't dumb enough to pay hundreds of thousands of dollars for cookie cutter 20-year houses when they don't bring home enough every month to make their mortgage payment.

[Brooke]

CondoBlue will be lucky if he can just "walk away" from his condo purchase. I guarantee that the bank did not finance the entire purchase with a non-recourse loan. The first 80 percent was probably the traditional mortgage and for that, there is no other recourse to the lender besides taking back the home. On the first loan, the banks have a 20% cushion protection before they are not able to sell the house to recover the loan.

But the remaining 20 percent was probably a home equity loan.On the other home equity loans, banks have the option of going after you in court even if after the sale, they cannot recover those loan amount.

In theory, they could try and take away his new home to recoup that 20% cost.

[Bill]

I wonder how everyone will react with the U.S. Government decides that things have changed and they are out of cash. They will stop paying social security and medicare and leave us in the same position as the lenders holding notes on overvalued condos.

Or in the alternative, they will send us a check but we will be able to cash it on the bus due to the runaway inflation that is allowed to bail out the unfunded and unpayable committments.

What is the difference between this current real estate bubble and the future federal promises bubble? Except for the size, they are the same. Self deception, greed and wishful thinking run into reality.

Life is a bitch and then you die.

[TrojanDLA]

Not a problem. The Federal Govt. walks away from its obligations all the time. Guess what happens to all that money you put into Social Security when you die at 66 and barely had a chance to cash any of it out? Does it all go to your heirs? NOPE. Most of it disappears into the Government black hole. And if you don't have a wife and kids, can you ask that they send the balance to a charity? NOPE.

When it comes to money, morality is what businesses use to exploit the common man - it's an unfair leverage. Banks look at you and expect you to live up to your obligations, but if a bank fails, then well, it looks to the FDIC, not the CEO, not the CFO and not anybody on the Board of Directors. Personal accountability in business, if such a thing exist, has always been one way. Businesses have NEVER been held accountable for anything that a bankruptcy can't cure.

To individuals dealing with each other may include morality clauses in their dealings, but when you bring a "corporation" into the picture, that morality becomes a pair of handcuffs that only the corporation holds the key to.

[LeavinLA]

Brooke: You're wrong again. They can't "go after" the second home because they don't have a security interest in it.

[hjeo]

What a joke. You bought #1 in a business deal. You should have known that the market would not support the bubble. You also should have done your diligence and understood exactly what could happen with an ARM. I think it is cowardly and heartless to stick it to the bank, especially when you have cash, another home, and a decent vehicle. How would you feel if the bank could just "take" your home because they felt that you got too much of a bargain? It's no wonder that the economy is hitting a recession.

[mike]

MORE CONDOS COMING ON MARKET EVERYDAY. DO NOT BUY A CONDO ANYWHERE UNLESS SO CHEAP AS TO BE TOTALLY UNBELIEVABLE. REMEMBER, IN THE U.S. WHAT WERE APARTMENTS THIRTY YEARS AGO ARE NOW CONDOS. PRACTICALLY EVERY APARTMENT CAN BECOME A CONDO. IF IT DOESN'T HAVE LAND WITH IT DO NOT BUY ANYTHING. WITH EVERY TOASTER YOU BUY YOU SHOULD GET A FREE CONDO. YA GOTTA LOVE THE BROKERS WHEN THEY SHOW CONDOS. HEY "it has granite kitchen counters" WHOA. REAL GRANTIE.. LIKE IT'S MARBLE FROM THE VATICAN QUARRY.

[CT home owner]

I believe that I heard the banks will evaluate personal situations,and if the mortgageholder has the ability to pay the obligation, they will take legal action agianst the homeowner who is attempting to walk away.

After waiting to purchase a home for years, we put 30% down with scores in the 800's -- it is frustrating to be paying 6.75% on 30-year fixed when I hear that sub-primes may have teaser rates frozen for 5 years. When I followed our home purchase on zillow,it allegedly is falling $2,000 a day for the last 6 months! I am in the process of appealing the property tax rate on the house -- the local assessor has deemed the house worth $250,000 more than we paid for it!! We are squeezed with record heating oil prices, as well.

[CT home owner]

On Good Morning, America with Diane Sawyer, screened 2/12, they reported that some homeowners are setting their houses on fire to collect insurance rather than foreclose.

[MIKE]

TO CORRECT THE MARKET TO WHERE PEOPLE HAVE TWENTY PERCENT DOWN AND PURCHASE HOUSES AT 3 TIMES THEIR ANNUAL SALARY, HOUSE PRICES IN THE U.S, WOULD HAVE TO FALL ABOUT 40%. BY THAT TIME MANY PEOPLE WON'T HAVE THE 20% DOWN HAVING SPENT IT ON VARIOUS BILLS, ETC. THIS IS THE BIG ONE, FOLKS. IF YOU HAVE VERY LITTLE OR NO EQUITY IN YOUR HOUSE - NOW IS THE TIME TO STOP MAKING MORTGAGE PAYMENTS UNTIL, AND I SAY, UNTIL(not unless) THE BANK OR MTG COMPANY RENEGOTIATES YOUR LOAN RATE TO MARKET. CALLED "MARK TO MARKET" BY THE BIG BOYS. GIVE THE BANKS A CHOICE: THE HOUSE OR A "mark to market" MTG RATE. DO NOT CONTINUE TO MAKE LOAN SHARK INTEREST PAYMENTS TO FINANCIAL INSTITUTIONS WHEN THE ASSET IS LITERALLY DEPRECIATING DAILY. THE FINANCIAL INSTITUTIONS MADE PLENTLY OF MONEY JUST WRITING THE MORTGAGE SO DON'T WORRY ABOUT THEM. RE: LOCAL ASSESSMENT OF HOMES- SEND A REGISTERED LETTER TO TOWN HALL INDICATING YOU ARE APPEALING ASSESSMENT. APPEAL DESPITE ANY DEADLINES THEY QUOTE TO YOU. INSIST ON AN INTERIOR INSPECTION OF HOME. APPEAL THAT. SEND ASSESSMENT TO ATTORNEY GENERAL IN YOUR STATE ASKING TO INVESTIGATE TAXING AUTHORITY IN YOUR LOCALE. EXCEPT FOR A FEW PLACES IN MANHATTAN AND ELSEWHERE, THERE ARE FEW HOMES THAT ARE NOT WORTH LESS NOW THAN 5 MINUTES AGO. IT'S A STRICLY FALLING MARKET.

[LeavinLA]

CT: Have you actually been reading this blog -- or did you just jump in and shoot off your mouth? In CA, purchase mortgages are non-recourse. The lender can only take back the property. That's the contract that both parties agreed to.

[Kevin Culbertson]

It is indeed a tragedy that condoblue can rationalize the decision to walk away from an obligation. It is even more tragic that other bloggers agree with that decision. I would like to know the “big company” that is the employer of condoblue so I may be certain to never use their services. If this is the character of their employees, they will hopefully fail in the near term. Maybe as a public service, all of us that honor our obligations could have that company’s stock granted short to make up for the actions of selfish, poor character people like condoblue. Whatever happened to personal responsibility? Condoblue made a commitment. That commitment needs to be honored. Even for those, which condoblue is not, that claim they were “duped”, tough. If you were not smart enough to do the math, tough. A reasonably intelligent hamster can figure out whether a mortgage - or any other payment - payment can be afforded. The only people losing in this instance are those like myself who do not take on debt that we cannot handle. Our finances are devastated by people with no character such as condoblue. However, we continue to do what is right. No accolades. No politicians looking out for our well being. No recourse. What a wonderful world.

[Maria]

I am glad condoblue shared her story here. I have to admit that her reasoning makes sense. And in my opinion, it's the bank's fault for not working with her to refinance on a 30-year fixed rate note. If they did that, she could rent it out or something and perhaps hold onto it for 10 years or so until prices level out again.
I think more and more people will follow her example; she is smart to have purchased house #2 before she gets out from house #1 with bad credit. And I agree-- who needs good credit if you own your house and pay cash?
P.S. To everyone referring to condoblue as a "he"; it's a "she." ;)

[Mark]

Hey, for anyone seriously considering doing this - you should check out the blog of someone real who had to do this several years ago: http://foreclosuremine.blogspot.com/